BNY Mellon Capital Markets, LLC Weekly Market Commentary

The government did not default; not that anyone in market expected that event. There was certainly stress in the bill market, especially the very short bill market, even though a worst case scenario pointed to a few days delay in payment. We look at this volatility and stress as a cautionary signal on regulation, with “breaking the buck” concerns likely pushing many money market funds from taking the more logical approach of fair value, even if these bills were redeemed a few days late. This is neither here nor there, however, following last night’s agreement that funds the government through January 15 and raises the debt ceiling through February 7. Rates have had the most profound move on the agreement, trading down (in yield) to their lowest yield levels since mid-August. There is a growing chorus of traders, analysts, strategists, etc., that think that the need to restart data and a less than final resolution in Washington effectively pushes out any tapering until at least March, 2014. We are not yet in that camp, and will guess that December remains a viable date. Futures contracts have, nevertheless, moved the chance of an initial rate hike into 3Q:15, which appears a bit aggressive in our view, particularly after the more hawkish than expected September minutes. IG and HY yields and spreads have compressed since the start of the month, and have quickly approached resistance points. Corporate issuance has been muted following the record September, along with the earnings quiet period and government shutdown. Economic data should begin to flow as early as tomorrow, and next week will likely be an avalanche of delayed data. The payroll report is expected later next week, with September’s numbers likely to be reliable, although October’s readings may be questionable. Read the full commentary now.

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